INTEREST ON FARM LOANS 685 



in both time and place. Selection 226 points out numerous reasons 

 why the market price of loans should vary in quite the same way in 

 which the price of wheat varies at different times and in different 

 markets. Where these barriers are artificial in character, wise legis- 

 lation will aid in removing them and in giving a high degree of fluidity 

 to capital. But so long as the market situation is one in which a 

 strong demand meets a relatively scarce supply of loan funds, no 

 amount of legislative price-making wih 1 make loans cheap. 



A. The Theory of Interest 



220. THE RATE OF INTEREST' 

 BY F. A. WALKER 



It has been said that interest is the compensation paid for the use 

 of capital. The usual form of statement is that interest is paid for 

 the use of money. Broadly speaking, this is not true. Money is, 

 indeed, often the agent in effecting the loan of other species of capital. 

 But money is not always, in a highly advanced state of industrial 

 society, it is, indeed, rarely, the agent in effecting the loan of capital. 

 The country merchant buys goods and gives his notes for two, four, 

 and six months, promising to pay the price with interest. Interest 

 on what ? On money ? No money passed in the transaction. What 

 was borrowed was hardware and crockery, dry goods, and groceries. 

 The young farmer buys cattle to stock his farm and gives his note, 

 promising to pay, with interest: not interest on money, for he has 

 had none, but interest on the value of cows and working oxen. 



Let us now inquire how the rate of interest is determined. Since 

 the use of capital is a matter of bargain and sale, or of exchange, what 

 should determine the rate of interest but the demand for, and the 

 supply of, loanable capital? 



If the people of a community be thriving and progressive, the 

 demand for capital, to start new enterprises, or to enlarge those 

 already established, will be very great. If the community be also 

 young, having brought to new fields the social and industrial ideas, 

 tastes, and ambitions of an old society, the supply of capital will be 

 scanty, and the rate of interest will rule high. 



Is this high rate of interest a hardship ? No, the hardship lies in 

 the scarcity of capital. The high rate of interest becomes the active 



1 Adapted from Political Economy, pp. 219-32. 



